The Role of Cross-Border Pipelines
The cross-border oil and gas trade has grown significantly in the past 50 years. How much of the oil trade is carried by pipeline is uncertain. The vast majority of oil moves in ocean-going tankers, and in addition to pipelines also is shipped by rail and trucks, with the result that precise data collection on transport methods is difficult. However, for gas there are only two serious transport options: pipelines and liquefied natural gas (LNG).
In the near future, the world will need more cross-border pipelines. Two factors explain this need: the location of oil and gas reserves and the patterns of energy demand.
Location of reserves. Reserves close to traditional markets are being depleted, and these markets are starting to look to newer, more remote sources of oil and gas for their needs. The successful exploitation of many of these sources will require pipeline delivery. In the case of oil, for example, some of the newer basins, notably those of the Caspian region, are landlocked. For other countries such as China, a vulnerability to naval blockade raises security-of-supply concerns against oil importation by tanker. For gas, the case for pipelines is even more compelling. Gas reserves close to market are declining, thus requiring gas to move further. The only alternative to pipeline transportation, liquefied natural gas, is cost-competitive with pipelines only over distances in excess of 3,000 miles (4,800 km). Despite recent improvements arising from scale economies and new forms of financing, LNG projects remain extremely expensive. Changes to energy demand patterns. Regulatory, institutional, and economic barriers in the past constrained the use of gas (with the notable exception of within the former Soviet Union). The future will see a greater role for gas in the primary energy mix in the Organization for Economic Cooperation and Development (OECD) countries, three factors limited the use of gas:
- Transportation problems meant that in many countries gas was not available.
- In the 1970s, the so-called “premium fuel” argument posited that because gas had so many advantages it was too precious to burn. As a consequence, for example, regulation both in the United States and the European Union specifically prevented the use of gas for power generation.
- Outside the United States, most gas suppliers were public sector utilities with monopoly and sometimes monopsony status. Gas prices thus were held artificially high and were uncompetitive. In the developing economies, in many cases gas simply was not available.
While during the 1970s some countries discovered gas reserves, their development for domestic use was painfully slow. Two reasons for this are:
- The realization of domestic gas consumption requires expensive infrastructure involving foreign exchange. Faced with the debt crisis of the 1980s, many developing countries could not afford the necessary infrastructure.
- Despite the often attractive project economics, many foreign companies were reluctant to help develop gas resources for domestic use because of the lack of convertibility of the domestic currency.
The gas export option also faced barriers:
- The size of gas reserves. An export project requires a minimum size of gas reserves to justify the huge upfront investments. Because of the currency convertibility problem, even those companies that had discovered some reserves lost their enthusiasm for further exploration. The reserves found often were suboptimal for export projects.
- The problems of negotiating export contracts. Most export contracts are for periods of 15-20 years. In an uncertain energy market, this span of contract means that the contract must be both flexible enough to address changing circumstances but rigid enough to be worth signing. Determining price is especially problematic if the gas is being sold into a “project supply market” where no “gas price” exists. To protect the financial viability of the project for producers and consumers, an absolute floor and an absolute ceiling price must be agreed. These fixed numbers must have validity over the life of the contract, and this in a world where it is hard to determine energy prices for one year ahead, let alone 15 or 20 years ahead.
- Security of supply. Security of supply is of much greater importance for gas than it is for other fuels. For electricity or oil products the loss of supply incurs outage costs, but when supply is restored, reconnection is simple. This is not so with gas. Because there is a danger that appliances may not have been switched off or that air may have entered the pipes, supply restoration ideally requires a gas engineer at every burner tip. The inflexibility in gas supply networks means it is difficult to replace lost supply quickly, with the result that importers tend to be wary of gas.
- The problems of long-distance transportation. Transporting gas is far more expensive than transporting oil. Gas pipeline transit and the security of supply. Security of supply is of much greater importance for gas than it is for other fuels. For electricity or oil products the loss of supply incurs outage costs, but when supply is restored, reconnection is simple. This is not so with gas. Because there is a danger that appliances may not have been switched off or that air may have entered the pipes, supply restoration ideally requires a gas engineer at every burner tip. The inflexibility in gas supply networks means it is difficult to replace lost supply quickly, with the result that importers tend to be wary of gas.
- The problems of long-distance transportation. Transporting gas is far more expensive than transporting oil. Gas pipeline transit, and the alternative, LNG projects, face a range of both potential and actual problems. Those of LNG, while diminishing, can be characterized as complex, extremely expensive, and plagued by long lead times. The cost of a project, including gas field development, liquefaction plant, special LNG tankers, and the regasification plant, in the past typically would be quoted at US $9-12 billion. The process of liquefaction furthermore was highly energy intensive, with around 15-18 percent of the gas effectively wasted in producing the liquid. LNG also raises safety concerns since it represents highly concentrated energy. Past projects were extremely inflexible and spot trading in LNG almost unheard of. And such projects offered limited revenue benefit to the governments concerned.
Over the last 10 years, forces have been working to reduce or remove these constraints, leading to a growing role for gas in primary energy and with it a need for more cross-border gas pipelines. These forces for change include the following:
- Regulatory restrictions on gas consumption arising from the “premium fuel” argument were removed in the OECD in the early 1990s. Of the hydrocarbons, gas is relatively environmentally friendly, having high conversion efficiencies from useable to useful energy. It is also relatively clean. Burning natural gas emits only 75 percent of the NO and 50 percent of the CO2 released by the burning of other hydrocarbons. It emits no SO. If the Kyoto Protocol emission targets are to be achieved without the use of more nuclear power, the only realistic option is considerably greater use of gas.
- Governments are deregulating and liberalizing electricity to encourage private sector investment, and private investors in electricity generation have a strong preference for combined-cycle gas turbine (CCGT) technology, for three primary reasons: (a) economies of scale are less relevant, so small plants are economic; (b) conversion efficiency is around 60-65 percent, compared to 30-33 percent in conventional thermal stations; and (c) the lead time on plants is short — a plant can be completed in two years, with some generation beginning in one year. CCGT projects thus have a potential for short paybacks that is attractive to private investors. The International Energy Agency’s (IEA’s) Reference Scenario in its World Energy Outlook 2000 sees a substantial rise in gas-fired power generation: between 1997 and 2020 in OECD Europe gas-fired power generation is forecast to rise from 12 to 38 percent of total electricity generation, in OECD North America from 12 to 27 percent, and in OECD Pacific from 19 to 26 percent. Gas markets increasingly are being deregulated and liberalized, promoting the development of commodity supply markets and gas-to-gas competition. Prices, therefore, can be expected to fall. Developments in the European gas market under pressure from the European Union exemplify this change.
- The gas transportation situation is improving. Work is being done on technical solutions such as gas-to-liquid and gas-by-wire transportation, and it is worthwhile also mentioning the improvements in LNG handling. A combination of technological developments, economies of scale, and new methods of project finance mean LNG project costs and lead times are falling. More projects also are coming on stream, raising the likelihood of improved flexibility in LNG trading. In 2000, a number of companies ordered LNG tankers for independent operations, presaging a large potential increase in spot trading. Gas consumption thus is expected to rise. The example of the United Kingdom provides an insight into how this can occur. Since the late 1980s, most of the barriers discussed earlier have been removed in the United Kingdom. As can be seen, the consequences for the share of gas have been formidable.